SWOT ANALYSIS

The diagnosis of a firms strengths and weaknesses can be fruitful only if the environmental factors and market conditions are considered along with the internal capabilities. This approach essentially involves matching of the internal capabilities with the environmental opportunities and threats, and is known as SWOT (Strengths and Weaknesses, Opportunities and Threats) analysis. In a way SWOT analysis may be said to consist of interlinking he ETOP and SAP. Strength and weakness are relative terms. Resources available in plenty may appear to be a strength but if not utilized may cease to be a strength. Corporate strength is a competitive advantage and through other competencies, a company may exert change mechanisms in a industry A corporate weakness refers to constraints or hindrances that tend to stop movement of a company in certain directions decided as strategic directions for the company and also inhibit a company to achieve core competencies.

Criteria
Various criteria can be used to define whether specific corporate capability is a weakness or strength. In historical criteria analysis, a specific characteristic is seen in the light of the history and past performance and is evaluated based on certain indices like sales, profits, market share etc. to determine whether it had been a strength or a weakness. In normative criteria a particular characteristic is seen in the light of what it ought to be from the point of view of experts, based on which norms can be developed to categorize it as a weakness or a strength. In competition equality criteria, it is assumed that the characteristic selected should be at least at par with the competitors and based on a comparative yardstick it may be considered as a weakness or a strength. The extent of matching of internal capabilities and environmental conditions is reflected in the following schematic view of the position of Reliance Textile Industries Ltd:
Internal Capabilities Modern plant and machinery: Production and technological capabilities of a high order. Design capabilities to provide diversity of designs as also frequency of change. Financial strength derived from: Ability to generate foreign exchange, Tax planning Cash generation on account of exports and yarn sales. Voluntary equity participation dealers resulting in assured commitment. Environmental Factors Growing demand for high quality fabrics in different categories of blends Awareness of foreign fashion and wide range of designs of international standards. Willingness of consumers in various segments to pay high price to match the quality requirements. Restrictions on imports of fabrics. Necessity of providing full range of fabrics under one roof catering to family purchase. Need for identifying design changes to cater to shifts in fashion.

Strengths
Strength is a resource, skill or other advantage relative to competition and the needs of markets a firm serves of anticipates serving. Strength is a distinctive competence that gives the firm a comparative advantage in the market place. Financial resources, image, market leadership etc. are examples.

Measurement of Strengths
The strengths and weakness occur in various forms and degrees. Various methods are used to give objectivity to measurement of weaknesses and strengths that are discussed below:

1) A list of attributes of a company may be prepared. Each of these attributes or characteristics may contribute to the growth of the company through distinctive competitive advantage due to a definite degree of presence of an attribute that would indicate the extent to which a specific attribute is a strength or weakness. Usually, a unit of measurement is quite difficult. However, a scale must be chosen and classifications made. 2) Statements on health care education, training etc. of their employers or statements reflecting leadership, innovation, R and D etc. show that a company values these attributes as their strengths. 3) For certain statements like shared values, congenial climate and culture, managerial competence, initiative, human relationship skills etc., no specificity can be attached and it may be difficult to measure their efficiency or effectiveness and only a subjective evaluation of these factors can be made. 4) It is easier to measure the functions at SBU level like market share, cash flow, finances, productivity of systems etc.

Weakness
A weakness is a limitation or deficiency in resources, skills and capabilities that seriously impedes effective performance. Facilities, financial resources, management capabilities marketing skills etc. are examples. 1) Sources of Outfit i) If the bulk of the profit comes from a single product, that itself is a form of weakness. What is its status in the life cycle? What is the status of competition? What is the status of industry sale? Product quality? Is the market share currently enjoyed commensurate with quality, competition, and price status? Is their scope for further growth in sale through product development? ii) What is the scope for developing other profit yielding products? iii) Is the technology continuing to be up-to-date or is there a risk of better technology appearing in the near future? What is the danger of substitution? iv) Is the product itself having any danger of becoming obsolete in the near future? 2) Risks: The Possible risks may be i) The product having danger of obsolescence. ii) The danger of being priced out. iii) The danger of substitution. iv) The danger of new competition coming. v) Inadequate measures viewed against product/market scope.

Opportunities
An opportunity is a major favorable situation in the firms environment. Identification of a previously overlooked market segment, changes in competitive of regulatory circumstances, technological changes etc are examples.

Threat
A threat is a major unfavorable situation in the firms environment. It is key impediment to the firms current or desired future positions. The entrance of a new competitor, slow market growth, major technological change, appearance of a substitute product are examples. The analysis can be used in at least three ways in strategic choice situations: i) The most common application provides a logical framework guiding systematic discussion of the business situation, alternative strategies, and ultimately, the choice of strategy.

ii)

In a second application of SWOT analysis, key external opportunities and threats are systematically compared to internal strengths and weakness in a structured approach.

SWOT Analysis can be applied in different ways in the choice of strategy: 1) It provides a logical framework to be used for systematic discussion of various issues bearing on the business situation, alternative strategies, and finally the choice of strategy. Indeed, it ranges across all aspects of a firms situation. 2) Another application of SWOT analysis is the structured approach whereby key external threats and opportunities may be systematically compared with internal strengths and weaknesses. Thus, the firms internal and external situations can be matched so as to form distinct patterns, and the strategy chosen on the basis of the situation reflected in a pattern, as shown on the diagram ahead. There are four cells in the diagram, of which Cell 1 may be said to represent the most favorable situation with numerous environmental opportunities and substantial internal strengths. Aggressive growth-oriented strategies are indicated in this type of situation. On he other hand, the situation represented by Cell 4the most unfavorable one calls for strategies involving with drawl or reduced operation in the product-markets. The least favorable situation is obvious in Cell 4 with major environmental threats and critical internal weaknesses indicating defensive strategies.
Numerous Environmental Opportunities Cell 3: Turnaround strategy Critical Internal Weaknesses Cell 4: Diversification Strategy Cell 1: Aggressive Growthoriented Strategy

Cell 2: Defensive Strategy

Substantial Internal Strengths

Cell 2 represents a mixed situation with substantial internal strengths combined with major environmental threats. Diversification strategies are indicated for this type of situation involving the use of current strengths of exploit long-term opportunities in other product-markets. A mixed situation of another kind is represented by Cell 3. A firm facing this situation has environmental opportunities but constraints of severe internal weaknesses do not permit immediate gains to be derived from the opportunities. A two-fold strategy is thus indicatedeliminating the weaknesses along with more effective pursuit of market opportunities. 3) The Cell-wise situations in which firms have to be actually placed often pose problems to the strategists. A business may have several opportunities but also face some serous threats in the environment. It may have likewise several weaknesses along with one or two major strengths. In such situations, the SWOT analysis guides the strategist to visualize he overall position of the firm, and helps to identify the major purpose of the grand strategy being considered.

Major Environmental Threats

PORTFOLIO MATRIX / ANALYSIS

Usually a company is engaged in diverse activities and in many businesses, and operates in different markets with varying investments that bring in various returns in different degrees. The returns themselves keep on changing with different factors like competition, market scenario, customer preferences etc. in an industry. The job of the strategy manager is to draw a picture of all these happenings for better comprehension, and understanding various operational equations of cash flow, financial requirements, etc. Depending on the results, the managers have to learn to diversify and choose options from the available many alternatives for meeting immediate and future objectives. When a company has vary complex and multitudes of operations, the problem becomes multidimensional and there are compelling needs to account for various dimensions and take decisions on resources, cash flow, financial requirements etc. The approach essentially has to be holistic rather than concentrating individually on each business. This multi-pronged approach is called portfolio analysis. Keeping rate of return on investments are in the form of resources, the objective of a manager is to analyze the corporation as a whole, considering different businesses in which it is involved to make best use of resources to derive desired benefits. This kind of analysis is called as portfolio analysis, and is done to maximize the rate of returns by analyzing the present resource allocation and continual evaluation for future implication and taking decisions on products and operations that require expansion, closure, or curtailment. A company that operates in an environment is faced by competitive strategies of other companies and hence portfolio analysis also takes into account the companys core competencies, resource allocation, and spectrum of characteristics of the industry. Portfolio analysis (also referred to as corporate portfolio, business portfolio, or product portfolio analysis; at the corporate level, there may be many businesses; at the business level, there may be many products) is a set of techniques that helps an organization, particularly having many businesses/products, in making strategic decisions with regard to individual businesses or products in its portfolio. Portfolio analysis in strategic management has been taken from investment management where portfolio means the combination of different securities with varying risks and returns. It was introduced in strategic management in mid 1960s and since then, many approaches of portfolio analysis have been developed.

Balancing of Corporation Portfolio

Portfolio analysis is done with a view to balance the investment of a corporation in different products, businesses, or industries. When there is a lot of diversification in investments in limited markets it is found to be very useful. The balancing is to be done with regard to three basic aspects. i) Cash Flow Requirements ii) Development iii) Risks involved i) Cash Flow Requirements: The cash flow patterns in various business is different in different stages and portfolio analysis attempts to balance the cash flow in each business such that they are in synchronism with the selected financial strategies of a company. Usually it is found that new businesses require additional cash flows although profits are also higher, whereas mature businesses require comparatively lower cash flows and are also relatively less profitable.

ii) Development: Innovation and product developments are a necessity for a company for its survival, growth, and profits generation. A company follows a product life cycle, that is, a product is created to satisfy a need of a customer, it matures, and finally declines. This is true for all the products and services of a company. A company cannot afford to develop a new product when some of its products are declining because it may not be in tune with the rate of changes. Hence a balance is to be struck in the development of products and services, their growth, maturing and decline, such that investments required in each category and returns are balanced. Thus, the firm keeps on growing when its products are in their different stages of life cycle. iii) Risks: One cannot operate in a totally risky environment or in a totally safe environment as both these extremes are only theoretical in nature. However, the objective of a company would be to reduce the risks if not eliminate them completely. Complete elimination of risks may be quite expensive and not desirable. Operating in a totally risk-free environment may lead to lower returns than expected. A company tries to balance investments and additional cash flows in different businesses such that risks are reduced and balanced in different products and services. Portfolio analysis is a two-dimensional technique (like two dimensions risk and return in investment management); one dimension is external variables and other dimension is organizational variables. Various methods of portfolio analysis consider these two dimensions, though in different forms and with different nomenclature. Prominent portfolio techniques are as follows: 1) BCG growth-share matrix, 2) GE nine-cell planning grid, 3) Product/market evolution matrix, 4) Directional policy matrix, and

BCG Matrix
The Boston Consulting Group (BCG) matrix, such as the one shown in figure given below provides a graphic representation for an organization to examine the different businesses in its portfolio on the basis of their relative market shares and industry growth rates. As shown in the figure businesses could be classified on the BCG matrix as either low or high according to their industry growth rate and relative market share. The vertical axis denotes the rate of growth in sales in percentage for a particular industry. The horizontal axis represents the relative market share, which is the ratio of a companys sales to the sales of the industrys largest competitor or market leader. The four cells of the BCG matrix have been termed as stars, cash cows, question marks (or problem children), and dogs. Each of these cells represents a particular type of businesses. These different types of businesses, with some contemporary examples from the Indian Corporate world, are described below.
Industry growth rate

High 20% 15% STARS QUESTIONS MARKS

10% i) Stars: Stars are high-growth-high-market share businesses, which may or may not be selfsufficient in terms of cash flow. This cell corresponds closely to the growth phase of the product 5% High Relative Market Share CASH COWS DOGS Low

life cycle (PLC). A company generally pursues an expansion strategy to establish a strong competitive position with regard to a star business. In the current Indian context, there are many businesses, which could be considered as stars. For instance, petrochemicals, electronics and telecommunications, fast foods, ceramic tiles, among others are some of the industries, which have a very high growth rate. ii) Cash Cows: As the tem indicates, cash cows are businesses, which generate large amount of cash, but their rate of growth is slow. In terms of PLC, these are generally mature businesses, which are reaping the benefits of the experience cure. The cash generation exceeds the reinvestment that could profitably be made into cash cows. These businesses can adopt mainly stability strategies. Where long-term prospects are exceptionally bright, limited expansion could be adopted. As cash cow industries lose their attractiveness and tend towards a decline, a phased retrenchment strategy may be feasible. The cash generated cash cows is reinvested in stars and question marks. Scooters for Bajaj Auto, toothpaste for Colgate, decorative paints for Asian Paints, moulded luggage for Blowplast, and India Today for Living Media are some of the cash cows in the contemporary Indian markets. iii) Question Marks: Businesses with high industry growth but low market share for a company are question marks or problem children. They require large amounts of cash to maintain or gain market share. Question marks are usually new products or services which have a good commercial potential. The logic of the experience curve dictates that the company obtaining an early lead can expect cost advantages and market leadership and can successfully create entry barriers. No single set of strategies can be recommended here. If the company feels that it can obtain a dominant market share, it may select expansion strategies, otherwise retrenchment may be a more realistic alternative. Question marks, therefore, may become stars if enough investment is made, or they may become dogs if ignored. There are several industries in India where many companies find themselves holding businesses, which are question marks. Holiday resorts, light commercial vehicles, home improvement products are a few of the examples. iv) Dogs: Those businesses which are related to slow-growth industries and where a company has a low relative market share are termed as dogs. They neither generate nor require large amounts of cash. In terms of PLC, the dogs are usually products in late maturity or a declining stage.

Problem/ Limitations of BCG Matrix

1) The four-cell matrix is based on the classification of businesses into high-low. However, businesses vary between high and low and, therefore; they can be classified into further categories, for example, high, medium, and low. Thus, four-cell classification does not truly reflect the nature of business even if only two dimensions of measurement are taken into account. 2) The four-cell matrix gives consideration only to relative market share position and growth rate of sales. No doubt, these are important dimensions but other dimensions are equally important from strategic management point of view. These may be the stage of product/market evolution. Strategic posture of different businesses, presence of competitive advantages and distinctive competence, emerging threats and opportunities, capital requirement, size of market, etc. 3) Long-term profitability is subject to variety of influences not directly tied to growth and market share. This fact has not been considered adequately by the four-cell matrix. For example, in many industries organizations with low market share are able to earn high profit and sometimes outperform large rivals.

4) BCG model considers two dimensions business growth rate and market share at the time of evaluation of strategic alternatives. It means any new businesses of company which cannot command requisite market share because of gestation period, falls in the category of a dog. However, the situation is far away from reality and the business may have great potentiality to stay in the business portfolio. 5) The success of a business is not measured purely in terms of market share and market growth. There are other considerations to keep a business such as its synergistic effect on other businesses. 6) Various tags star, cash cow, question mark, and dog-attached to different businesses creates psychological problem as found in a research study by Gupta and Govindarajan.

Stop Light Matrix/Ge Nine-Cell Planning Grid

In order to overcome the weaknesses of BCG portfolio matrix, General Electric Company (GEC) of USA has developed a nine-cell grid with the help of McKinsey & Company of USA, a leading consultancy firm. GE grid differs from BCG model in two respects, which are as follows: 1) The GE grid has considered a number of factors in assessing the industry attractiveness and business strength instead of the single measure for each of two dimensions market share and market growth. 2) The GE grid considers three degrees of a dimension high, medium, and low as compared to two degrees high and low employed by BCG model. Business Strength Factors and Measurement: GE considers market share, profit margin, ability to compete, customer and market knowledge, competitive position, technology, and management caliber to measure business strength. These factors may be quantified on the basis of assessing the strength and importance of different factors for being successful in an industry. The degrees of strength and importance may be assigned rating and weight subjectively based on personal experience. Industry Attractiveness Factors and Measurement: Industry attractiveness factor include market size and growth rate, industry profit margin, competition, seasonality and cyclicality, economies of scale, technology, and social, environmental, legal, and human factors. These factors can be quantified in the same way as has been done in the case of business strength factors. Nine cells of GE grid are dividing into three zones and depicted by different colors: green, yellow, red. This analogous to traffic signal green for go, yellow for wait, and red for stop. For this reason, GE grid is also termed as spot-light strategy matrix. Each zone of the grid presents a specific type of strategy or set of strategies which is as follows:
Industry attractiveness

Zone

Strategic signal

Green
High

Invest/Expand Select/Earn Harvest/Divest

Yellow Red

Medium

Low Strong Average Business Strength Weak

GE nine-cell Planning Grid

1) Invest/Expand: In the first zone, a business has opportunity to grow through further investment and expansion, this zone is characterized by the presence of both: business strength and industry attractiveness though each cell represents different combinations of these. In the extreme left-hand corner, both are high which is ideal situation for growth; however a business does not remain in this situation for a long run. This happens because the industry will attract other players, unless there are some strong entry barriers. For example, Information technology, being the most attractive industry at one point of time, has not remained as attractive because of entry of all sorts of players, almost, having hard mentality. The other two cells are more realistic description of business situations. In high attractiveness and average strength, and organization can grow although, in the long run, it may become dangerous for it if it does not build strength in its business. For example, at the initial stage of economic liberalization process, many companies entered light commercial vehicle segment even with foreign technical collaboration. At that time, the industry was considered one of the most attractive. At present, none of them is performing well. The third situation is, perhaps, most realistic situation of growth. Though industry attractiveness is medium, the organization has strong strength on the basis of which, it can generate competitive advantage for itself, which may act as entry barrier for many aspiring entrants. When Reliance entered polyester and polymer businesses, these were not considered highly attractive on the above grid but the company had strength on the basis of which it created enormous capacity to compete. 2) Select/Earn: This zone presents a mixed situation in which much growth possibility does not exist. However, it presents the opportunity for selective earning. The opportunity for selective earning exists because either one of the two determinants business strength and industry attractiveness is high or both stand in the middle. While two cells average strength with medium attractiveness and strong strength with low attractiveness indicate hold position, that is to earn profit with the present level of capacity, the third cell provides flexible situation. On the one hand, it represents continued earning because of high industry attractiveness; on the other, it suggests the scope for improving strength and if that is not possible, the business may be put in the category of question mark, which requires its reassessment and a possible candidate for divesting. In the case of strong strength and low industry attractiveness, either the organization can go for vertical integration, either forward or backward depending on the nature of industry, or may seek diversification where present strength can be utilized. 3) Harvest/Divest: In the case of red cell, the organization has to stop. In this case, harvesting or divesting strategy is suitable. Harvesting involves a decision to withdraw from a business but withdrawal is not immediate. At the initial stage, focus must be on cost cutting particularly on those items, which have long-term impact such as research and development, advertising, etc. The objective is to earn short-term profit, as business is not attractive in long run. Cells having average strength with low attractiveness and weak strength with medium attractiveness are fit for harvesting, in the case of extreme right hand bottom cell in which both dimensions are not positive, immediate divestment is required as any delay may result into lower attractiveness to prospective buyer. The GE nine-cell matrix offers some distinct advantages. Compared to the BCG matrix, it offers an intermediate classification of medium and average ratings. It incorporates a larger variety of strategic variables like the market share and industry size. The GE matrix is also a powerful analytical tool to channel corporate resources to businesses that combine medium to high industry attractiveness with an average to strong business strength/competitive position. On the other hand, the major drawback of the

GE matrix is that it only provides broad strategic prescriptions rather than the specifics of business strategy.

Hofers Product Market Evolution Matrix

Hofer and Schendel propose a 15-cell matrix that considers the stages of development of the product or market and the competitive position of different businesses in a companys corporate portfolio. As in the GE nine-cell matrix, circles are plotted to represent the size of the industry while the segments denote the business market share. Figure shows a typical product/market evolution matrix.
Development

Growth

Shake out Maturity/ Saturation

Decline Strong

E Average Competitive Position Weak

Five businesses have been shown with their respective market shares with regard to the industry size. Business A represents a product/market that has a high potential and deserves expansion strategies through large investments. Business B has a strong competitive position but has product that is entering the shake-out stage and, therefore, needs a cautious expansion strategy. Business C is probably a dog, while D represents a business which can be used for cash generation that could be diverted to A and B. Business E is a potential loser and may be considered for divestment. In this manner, the product/market evolution matrix portrays a companys corporate portfolio with a high level of accuracy and completeness.
Competitive capabilities

Directional Policy Matrix

Directional policy matrix (DPM), developed by Shell Chemicals, UK, uses two dimensions business sector prospects and companys competitive capabilities to chose strategies. Each dimension is further divided into three degrees business sector prospects into unattractive, average, and attractive and companys competitive capabilities into weak, average, and strong. The combination of two dimensions with three degrees of each gives nine cells as shown in figure below:
Weak Divestment Phased withdrawal Double or quit

Average

Phased withdrawal Cash generation Unattractive

Custodial

Try harder

Strong

Growth Average

Market leadership Attractive

Business sector prospects

In Figure above each quadrant shows the type of strategy, the organization may adopt. The key words used are briefly explained below: 1) Divestment: A business with weak capability and unattractive business prospects usually incurs losses at the present and the situation is likely to continue in future too. Therefore, such a business should be divested and resources released should be utilized in other businesses. 2) Phased Withdrawal: Such businesses which fall in quadrant 2 with weak capability and average business prospects, or in quadrant 4 with average capability and average business prospects may be divested in phases as these businesses are not likely to earn enough as compared to other businesses in the portfolio. 3) Double or Quit: The business, which has high business prospects but weak capability, may have two alternatives. Either the business is strengthened by allocating additional resources to take the advantages of the attractive business prospects, or if it is not possible to allocate additional resources, it is advisable to divest. 5) Custodial: The business falling under average capability and average business prospects has two alternatives. Either the organization may bear with the situation and make good the overall position with the help of other businesses, or it may divest this to concentrate on other businesses. 6) Try Harder: The business, which has average capability but attractive business prospects, needs additional resources to strengthen its capability so as to take the advantage of attractive business prospects. 7) Cash Generation: The business, which has strong capability but unattractive business prospects, may be used for cash generation and no further investment is required because of unattractive business prospects. 8) Growth: The business with strong capability and average business prospects requires additional investment in the form of product innovation through R&D and creation of additional production capacity so as to fight in the market to increase market share. 9) Market Leadership: The business with strong capability and attractive business prospects may be used to become market leader by allocating additional resources and once market leadership is established by innovation, to maintain leadership position.